Sunday, 5 March 2017

Kenya inching close to exporting Crude oil

 Kenya is inching closer to becoming an oil exporting nation in the next three months. So far some 70,000 barrels have been pumped and stored in tanks at the Lokichar Basin where the well are. 

 The country is planning to export 2000 barrels a day in a pilot project that will enable concrete understanding of the wells.

 It is also a learning ground for the technical aspects of the oil evacuation since Kenya’s crude is waxy and can solidify en route. This is a major lesson that must be learnt before the design and construction of the Pipeline for it has to be understood the exact temperature at which the oil has to be transported.

Apart from understanding the temperatures, Kenyan officianado must also understand the oil business before signed the dotted lines. Kenya plans to produce some 2,000 barrels of crude a day for the pilot scheme. As at the end of February some 70,000 barrels were already in stock which means that by the end of June, an estimated 310,000 barrels will be in stock.

 Tullow, oil the majority stake holder in the operation last October advertised for a contract to lease 100 ISO T11 standard insulated containers with a minimum fluid capacity of 25,000 litres to haul the fuel from the Lokichar fields to Eldoret by road. From there it will be hauled by rail to Mombasa where it will be stored on Kenya Pipeline facilities ready for export.

A barrel of crude carries 159 litres. This means that each truck, called trailtanks, will carry 157 barrels meaning that 13 trucks will be needed to haul 2000 barrels. To haul it to Mombasa Kenya Railways Corp will require 13 flat-bed wagons per trip. The 310,000 barrels expected in stock at the end of June will be 20 days of trucking trips if all 100 trucks are deployed.

 The government upgraded the road to Eldoret from Lokichar at a cost of US$31.6 million.
The cost of transporting crude oil by road and rail over the 1,086 kilometre distance is estimated at $30-34 per barrel. 

This has critics wondering whether the venture is commercially viable at the current world market price of US$56 per barrel. However, they fail to grasp the real intention of Pilot oil export scheme. The purpose is to learn the ropes of the oil business and the technical and logistical requirements of hauling Crude oil to the Lamu port. Profit is a secondary motive here, learning not profit is the primary motive although the price must meet all costs including the operators’ operating costs.

 At $56 per barrel, the principal operator, Tullow Oil Plc and the Kenya government say it is viable.  The government may not get a coin at this stage of learning, but its own corporations, namely Kenya Railways and Kenya pipeline will have a share in the pie as logistical support providers.

Tullow’s count of the Turkana Oil reserves stand at 750 million barrels. However, its partner in the project, Africa Oil estimates that the fields could contain as much as 1.63 billion barrels. This is supported by the fact that new finds are being announced regularly.

 In January Tullow announced another find at Erut-1. It is not clear how much in terms of barrels was founds but they talked of a column estimated at 100-125 metres. Further explorations are still going on.

Kenya expects to start full oil production in 2020 when they expect to be producing 100,000 barrels per day. Consequently, she has begun the process of building its 850 Kilometre pipeline from the Lokichar fields to Lamu port. 

The construction is expected to start next year and end in 2021. It will be owned by the Joint Venture Partners, Tullow Oil, Africa oil and MAERSK and the Kenya government. The  865 kilometre pipeline, it is estimated will cost US$2.1 billion.

Tuesday, 28 February 2017

Hoima –Tanga oil Pipeline: was Tanzania short changed?

A Tullow Rig in Paipai- Kenya

DESPITE political talk to the contrary, it seems, Tanzania could end up with the short end of the stick in this project.  There is no clear, definable and quantifiable benefit for Tanzania, political rhetoric notwithstanding. The Tanzanian President was recently quoted as bragging that Tanzania will have three fuel pipelines including the Mtwara- Dar-es-salaam LNG pipeline, the Tanzania- Zambia white oils Pipeline and  now the Hoima- Tanga pipeline. 
 The cost-benefit analysis of the project does not support President Magufuli’s optimism.  However, Magufuli is ardent at jumping before looking. While the need and justification for the two pipelines is not hard to gauge, it is difficult to understand Tanzania’s stake in the third pipeline.

She has no oil so far and the possibility of finding oil looks dim so far. What is the Oil pipeline for? Will she invest or risk tax payers’ money in that project? Can it be justified in terms of economic gains? How will it contribute to Tanzania’s economic growth and welfare? How significant is that contribution? What are the Opportunity costs? Have they been quantified?

Uganda expects to make US$43 billion over the next 25 years. That is a cool US$1.72 billion a year which could be invested elsewhere in the country.  In fact, reports have it, Uganda is planning to mortgage the oil revenues to China for an SGR. 

Total SA has gained an extra 567 million barrels in Hoima fields. Assuming a fixed US$60 per barrel over the next 25 years, that is an additional US$34.02 billion. If you add the US$34.02 billion that was her share before she bought out Tullow oil, then Total SPA will generate some US$68 billion over the next 25 years other things being the same. And for this Total oil will sink any amount below US$10 billion.
Can Tanzania quantify her benefits in a similar fashion? Having waived VAT, what else is left for her?  Just being a landlord? How much rent will she get since she cannot charge for transport of crude per barrel. If Uganda, which owns the oil will earn only US$1.72 billion a year, how much will Tanzania earn as a Landlord? How significant is that to the economy?

In its previous life, the Hoima- Lamu pipeline was to be run by a SPV, Special Purpose Vehicle, which was to charge for transporting crude per barrel. That would have meant that the two countries were to invest in the pipeline which was expected to cost a pricey US$5 billion. This leads to the next question: was Total spa, “allowed” to build the pipeline or was it “contracted” to build it? Given that Tullow oil has surrendered the huge chunk of its price, "$700 million in deferred consideration which will be used by Tullow to fund the company's share of the costs of the upstream development project and the associated export pipeline project," it seems that the pipeline is purely owned by the private sector.

The structure of ownership of Hoima Oil Project changed in January 2017 when Tulllow oil Plc sold its 21.57 stake in the fields to Total SPA for $900 million. Now Total is the majority shareholder with a 54.87 Per cent stake. China National Offshore Oil Corp CNOC owns 33.3 per cent stake while Tullow, the minority stake holder holds 11.7 per cent.  If this will be the structure in the upstream operations including the pipeline, then Total will dictate terms. It cannot be “contracted” to build that which she owns.

 Reports indicate that the pipeline’s construction will be financed through equity and debt.  This means that the largest shareholder in the pipeline deal is still Total spa with 54.87 say in the matter of contracting the debt because they are expected to bear the greater burden. This is the expected structure in the downstream operations: Total 54.87; CNOOC 33.3; Tullow 10; Uganda 2 per cent; Tanzania? 

In the absence of any visible economic reasons, the view is gaining currency that the shift was a scheme to push Tullow out of Uganda by the French oil Major, Total. This is clear from Tullow’s stand on the shift of the export pipeline from Kenya to Tanzania. In March 2016, Tullow told Bloomberg that the shift to Tanzania “will have enormous opportunity cost.”  To them it was either “one joint pipeline through Kenya, or two separate lines,” Tim O’Hanlon, the London-based company’s vice president for African business told Bloomberg.

The hardline stand was not surprising for Kenya is the bedrock of Tullow oil’s business in east Africa. Her stock of recoverable crude is growing by the day. Some reports indicate that she could end up with 1.6 billion barrels in Kenya, making Kenya a more attractive proposition than Uganda where her share was slightly more than 500 million barrels. Her departure was therefore imminent.
 It is not clear whether Total SA, which was farmed into the Hoima-Oilfields by Tullow oil turned into a corporate raider. But there are fears it did, analysts say.

 After buying a third of the stake in Hoima oilfields, she went on to engineer a feasibility study of questionable competence which bad mouthed the Kenyan route causing Uganda to shift to the Tanzanian route.  That study apparently left the other partners out.  A part from irritating Kenya, Total Spa also gained by buying Tullow oil out, she increased here share of crude oil in Uganda to more than a billion barrels.

The buyout also saved her face for engineering the shift of the pipeline from Kenya to Tanzania which was becoming awkward as she had not found any oil in Tanzania where she has exploratory Licenses. Without oil in Tanzania, say industry analysts, raising the US$3.5 billion meant for the pipeline was tricky given that one of the partners opposed the new route.

This divergence of interests meant the time for divorce had come. That is how the deal to sale Tullows’ stake to Total was mooted and solemnized. Total will buy out Tullow stake for a whopping $900 million which is sweetened by the fact that it was staggered over time. Pay $100 million cash, another $50 million after the deal is approved and $50 million at the start of pumping.  In the meantime use $700 million to finance our stake in developing upstream infrastructure including the pipeline.

Analysts say that Tullow chose to protect its interests in Kenya where she has huge stock of recoverable crude – going to 800 million barrels than going the Tanzania route with its share of 567 million barrels. The Uganda oil stock is shared equally between, Tullow, Total SA and China National Offshore Oil Corp CNOC. The stake would fall further when the Uganda exercise its right to share in the Oil. 

That left the choices stark- she has to stand with Kenya where her interests are larger than Uganda, say analysts.  A week after the announcement of the sale of nearly 22 per cent stake in Uganda, Tullow hit the headlines with a find of another 50 Metre thick layer of recoverable oil at Erut-1 in Kenya raising her stock and prospects of a further increases.

  The apparent win-win situation is corporate myopia which left a bitter taste in some mouths. The diplomatic relations between Kenya and Tanzania were seriously hurt and could take a long time to heal.

 Further, by bad mouthing Kenya, Total SA has permanently locked itself out of the Kenyan Exploration scene. Analysts say, it will take a miracle, for Total to be allowed to explore for oil and gas in Kenya or even buy a stake in exploration companies in Kenya.

Kenya decided to go it alone and build a pipeline from Lokichar basin to Lamu port which will cost US$2.1 billion. The pipeline  will be financed by the joint Venture companies- Tullow, Maersk, and Africa oil and the Kenya government in equal share that 25% a piece.

 The firm is already preparing to pump about 2000bpd on experimental basis from July this year. Also to start about that time is the preliminary designs for the oil pipeline.

Monday, 20 February 2017

President Magufuli is Tanzania's Major risk factor

 It is rare for an elected government to become a stability risk for any country. However, in Tanzania, east Africa, the government, particularly the president is slowly assuming that dubious distinction

This is as a consequences of his disregard for due process and the rule of law in his governance style. It is becoming increasingly difficult to gauge the purpose of some of his actions for they appear to work against the country’s interests. Some actions even contradict the country’s economic and political goals.

For instance, transferring government funds from the private Commercial banks is reasonable if the government wants to spend the money and does not want to be tied down by investment contracts. However, it becomes a hurdle to economic activity if it is just parked at the Central Bank and the government begins to show a budget surplus because it did not spend the money. 

Economic growth is driven by flow of credit and money circulation in an economy.  Credit to the productive sectors is generated by savings in commercial banks that trade in money.  The central Bank does not trade in money and when the government is not spending the money in its account, the money is withdrawn from the economy. This leads to low circulation of money and therefore low demand even for local products. Low demand means low products and contraction of the economy.

The most telling contradiction of this move is it contradicts the government own stated goal of spreading wealth in Tanzania. Wealth is spread through consumption of goods and services. Without these, there cannot be any transfer of wealth.  The financial sector in Tanzania is weak. This is why they need support from the government in terms of deposits because, some government institutions, such as the retirement benefits schemes have a lot of cash lying idle in bank vaults. 

This is the money that when deposited with commercial banks, generate interest for the depositors and the banks  as the banks also sell -on profit-to those looking for credit.  One of the consequences of the withdrawal of money  is that commercial banks in Tanzania are posting losses due to credit squeeze and bad debts. 

The banks' deposits have declined after the loss of government deposits. The largest private bank, CRDB, for example, posted a loss of Tsh1.9 billion ($1 million) in the third quarter of this year. Twiga Bancorp also registered a loss of Tsh18 billion ($8.26 million) over the past year. These are indigenous banks whose fall could have serious ramifications of the economy.

The Central Bank of Tanzania is itself convinced that danger is looming.  It recently said in a statement, that weakness in the financial sector “poses a systematic risk to the stability of the financial system; the continuation of Twiga operations in its current capital position is detrimental to the interest of its depositors."

To avert risks associated with tight monetary policy, the government must spent taxes on goods and services. But the government is proudly announcing savings made due to certain restrictions. 

Restricting wasteful spending  such as foreign travel is good but the money so saved musty be spent on other sectors that buoy economic activity.

 Ironically, the government is not spending.  In the third quarter last year, which was the first quarter of the current fiscal year, the government ran a budget surplus of over Tshs 300 billion (US$ 150 million). It also saved another $500 million from restricting foreign travel. That is a whole US$700 million lying idle in consolidated account.

Governments collect taxes in order to spend –not to save.  In fact government are famous for running budget deficits- that is they spend more than they collect.  This is because there is more demand for government services than the available resources. Saving nearly 10 per cent of a country’s annual budget suggest that the government does not need the taxes. It should therefore ease the tax burden so that, citizens can have more money to spend and keep the economy going.

Another contradiction is the rejection of electricity tariff increase yet the government seeks to borrow US$200 million to pay off Tanesco’s debt. We have reliably learnt that the government had earlier tried to borrow from the World Bank for the same purpose but the request was rejected. Analysts do not see the current application succeeding. The government’s argument in rejecting the increase is; such an increase would hamber the President Industrialisation drive which is pegged on availability of electricity.
 In November, Dangotte Cement Tanzania closed for 10 days over dispute over availability of energy to fire the plant.  Book publishers are crying foul over the ban to publish school text books while some of the large corporations in the country are reportedly slowing down on investment in Tanzania. Some are even said to be considering decamping from the country altogether.

The far-reaching cost-cutting measures announced by President John Magufuli's administration since coming into office in November last year have become widely blamed for causing a liquidity squeeze in the economy that appears to be getting tighter by the day.

This has in turn had a ripple effect on the private sector - the engine of the country’s economic growth - leading to a decline in revenues and profits for various small, medium and large-scale businesses across several industries and sectors, according to analysts. At least six companies are rethinking their business and investment plans others, some of the biggest foreign firms operating in Tanzania, or their local arms, in sectors including mining, telecoms and shipping.

The president assumed office in October 2015 and embarked on a sacking spree of public servants deemed corrupt or in efficient. This scares civil servants and is likely to reduce Tanzania into a country of sycophants who do what the President says even if it is wrong.

The first to suffer the President’s wrath was the Tanzania Ports Authority whose managers were removed under the pretext of fighting corruption. Within two months the port had lost 42 per cent of its business to other ports in the Indian Ocean sea board. While there many factors driving the scampering from the Port, the major cause was delay caused by fear to work by employees at the port.
 Others who have been sacked in a humiliating fashion include the director of the National Institute for Medical Research (NIMR) Director General Dr Mwele Malecela whose only crime was to report that the dreaded Zika virus had been detected in Morogoro and Geita regions; the CEO of Tanesco for raising power tariffs, among others.

  On the Political scene, the President has effectively silenced the opposition by banning political activity. The malicious nature of this abuse of power is the humiliating arrest of Opposition MPs rights at the gate of Parliament on flimsy criminal cases. One of them has been languishing in Jail for more than four months over a charge of incitement. This charge is boilable in Tanzanian law and a person no less a former Attorney General of Tanzania, who is currently an MP of the ruling party was public quoted for wisdom in arrest MPs.

From the foregoing, it is clear Tanzania is headed in the wrong direction. The President, who is the single major threat to the country’s stability needs to slow down. He must stand back and take stock before the country implodes.

Monday, 16 November 2015

Battle taken to Al-shabaab

 Terror  Map July-August 2015

AFTER   series of brazen attacks on security installations during the Month of Ramadhan (Mid-June- Mid July), the battle for Somalia has turned against Al-Shabaab.

In June to mid-July during the Ramadan Holy Month) , the insurgents held sway in this war attacking Police stations and Military bases in a murderous orgy that saw 321 people, among them Police officers and troops dead.

An attack in Leego in early July was the turning point. Leego, an AMISOM military camp 30KM west of Mogadishu, the capital was manned by Burundian soldiers.  Reports then said that there were up to 1000 and in any event not less than 500 Al-shabaab fighters confronting a camp of 120. 

The camp was simply overwhelmed and at the end of the siege, 50 Burundian soldiers were dead. The camp was emptied of all military hardware. Several other camps were overrun in a similar manner in just one week.

In response, the African Union Mandated AMISOM together with the Somalia Nation Army launched Operation "Jubba Corridor" in Mid july.  The Campaign was boosted by the entry of additional Ethiopian soldiers armed with Firepower. This boosted the fire capacity of the AMISOM forces to chase Al-Shabaab especially on the rough terrain.

Operation Jubba Corridor was designed to uproot al-Shabaab from Gedo region of Somalia, which they had held for Nine years.  The insurgents were put on the run almost immediately as they were uprooted from the region. Contrary to previous fights, Al-shabaab's options in the Operation Jubba had narrowed.

Previously, when confronted by AMISOM which has a superior firepower, Al- Shabaab fled to another region of Somalia. Gedo region, was the last bastion of the insurgents and once uprooted from there, life became precarious and the death toll among them began to climb. 
In June, Al- shabaab killed 321 persons in 56 incidents accounting for 45% of the deaths. It recorded a MEARisk Cincident index of 2.64/5.00

Since then the battle has turned the other side. Al-shabaab is on the receiving end and security in such countries as Kenya is improving. Terrorism incidents declined 29% month- on month to 40 Incidents in July. The death toll shrunk 69% month-on-month to 98 deaths down from 321 in June. The MEARisk CIncidents declined marginally to 2.63 /5.00 in July.

There was further 13% decline in recorded terrorist related events to 35 in August which resulted in 65 deaths accounting 34 % decline in terror related deaths in east Africa region. Terrorism rating in the MEARisk Cincidents index declined from 2.64 in June to 2.33/5.00 in August, a 43% decline indicating that al-shabaab is under intense pressure and that its threat is being decimated.

As the death toll from  terrorism related events took a nosedive,  the death toll  from security and Defense incidents was rising, much of it  suffered by Al- shabaab. In June, there were 86 deaths caused by Security and Defense events arising from 51 incidents.  This was 12% of the total pool of 708 deaths recorded in June.

There was a dramatic increase in the number of deaths from Security and defense events in July. A total of 283 deaths were recorded in this category a 329% increase month-on-month. Of these Al-shabaab suffered 205 of the deaths, forming 74% of the total deaths recorded in this category.
There was similar dramatic increase in the deaths suffered by Al- shabaab to 601 in the Month of August. This was 293% increase over the death toll in July. Al- shabaab losses accounted for 71% of the 849 deaths recorded in August.

After being uprooted from Gedo region, Al- shabaab is now a bunch of homeless punks who must fight even to hold some territory. This makes life dangerous for it. Even then, it has continued its brazen attacks on AMISOM and Somalia National troops.  It has continued flexing its muscle, by ambushing AMISOM forces with devastating consequences on both.

 MEARisk analysts expect Al- shabaab to continue with its brazen attacks on AMISOM forces.  Though virtually boxed in, Al- shabaab will not raise the white flag. It will choose to fight to the last man standing. This shifts it's motive for fighting from overthrowing the western backed government in Somalia, to fighting for its own physical survival. It is thus going to be a thorn in the flesh for AMISOM until the last of them is defeated.

As in the past, we expect AMISOM to respond with a sledge hammer to any such attacks. Whatever the strategy, al shabaab adopts; a homeless military is no military. We expect the routing to continue and Al-shabaab’s position to get even more precarious.

Some its fighters, estimated to be 300, have been cut off at Boni Forest in an operation by Kenyan security agencies.  The 90-day operation, dubbed operation “Linda Boni” was designed to decimate the insurgents hiding in Boni forest which straddles both Kenya and Somalia.
In Somalia itself, Al- shabaab is losing large swathes of territory it once held. Although still fighting to recapture some of the lost territory, this fight could be a strategy to draw them out from the civilian areas. The fight to recapture some lost territory, it seems, could be Al- shabaab’s waterloo.

Al shabaab’s days appear to be numbered and getting fewer by the day.

Tuesday, 24 February 2015

Digital Migration, PPP and Uncompetitive behaviour in Kenya

TWO WEEKS AGO, the government of Kenya closed down the analogue broadcast system in some parts of the country. That meant all broadcasters had to shift to the digital broadcast system. While others were crossing the bridge, three leading media house chose to shut themselves even from the digital platform on which they were broadcasting previously. Their argument, they have not been in the digital broadcast platform and that the digital carriers were carrying the content of KNT, NTV and Citizen TV illegally.

 That move sparked off a debate that is still raging. The context of this piece is not to plunge into the Cacophony of noise that is passing for debate. Mine is to explain the new business model into which the media houses are moving.  The noise and shenanigans is a reflection of the failure by the media houses and their supporters- some of who claim some place in the intellectual world- to understand the concept of private Public Partnerships and what it involves.

 PPP is a business model which allows the government to divest itself of some of its functions to the Private sector.  The private sector is mainly involved in service delivery and maintenance of public platforms through which the services are delivered.  This model is useful in sectors in which service providers are also the regulators. The PPP model involves unbundling the functions of the sector so that some functions can be transferred to the private sector.

One such sector is energy. For years we knew of only Kenya power and Lighting Company in electricity generation, distribution and transmission. This sector was unbundled into four distinct functions: Generation, Regulation, Distribution and transmission. Now we have KPLC- distribution,  Kengen-in generation, Ketraco in transmission . Another entity, Geothermal Development Corporation was also created to fast track geothermal energy generation.

 In the telecommunications sector, the Former Kenya Posts and telecommunications was unbundled into; the regulator, the postal corporation and telecommunications service providers. This unbundling has witnessed the near death of the fixed line telephony provider. The ownership of National broadcast signal was placed in the hands of CAK or its predecessor, CCK in much the same way as Standard Gauge railway is the property of Kenya overseen by Kenya Railways Corporation. KR owns the Railway line. That is the platform.

 In the old dispensation, CCK used to grant investors the license to operate a Radio or TV station. Then the investor was to build the transmission stations.  In the Analogue technology, one needed to build ten transmitter stations to cover the entire country.  However, Transmitter stations are expensive to build and operate. That is why it needed an investor with deep pockets. Only KBC and Citizen owned more that transmitter stations country wide. The others owned only five transmitter station in the country.  That means that only KBC and Citizen TV could reach the entire country.

The rest had a limited reach until the entry of digital satellite TV carrier, DStV which carried their signal to the rest of the country.    It was thus inefficient and expensive.

However, new technological advances have spawned a new business model.  The digital technology has spawned more efficient and affordable model. The model Unbundles service provision from distribution of content.  This unbundling has separated content development and provision from the distribution function. This has made it possible a third party to be licensed to carry the distribution function. That is how broadcast signal Distributors came into being. This simply means that the TV investor will simply plug his studio to some platform and his content is broadcast for a fee. The fee is way cheaper than running a transmitter station.

The model is new in Kenya and some regulatory authorities such as Kenya Airports Authority still own, operate and regulate Airports in the country. However, it is also moving in the direction of licensing private players to develop Terminals such as the Greenfield terminal at JKIA.  The authority, reports say, will employ the same business model to develop Airports in Lamu and Lake Turkana.

 The function of distributing the national asset was placed squarely on the shoulder of CAK. It  had thus to choose between providing the platform itself or divesting that function to someone else. It chose to transfer the function to BSD’s. The much maligned CAK and its predecessor CCK, invited a third party to perform, the distribution function for a fee thus divesting the broadcasters of the expensive distribution function which stymied their growth, that is, expansion to cover every part of the country with their broadcast signal.

It is at this point where illiteracy becomes manifest.  In the new dispensation, content – not financial muscle- is king. And this is where competition is open. It is the digital platform that will enable the growth of specialty TV channels –and we’re beginning to see this emerging with such Channels as Farmers TV and Health Africa TV.  Many more would soon follow.

Now all it takes is a million shillings a month for one to broadcast country wide.  Competition is in content development- not deep pockets or ego. If you have right content, viewers will tune to your channel- and advertisers will follow in case of Free-to-Air channels. On the converse, if one is producing unacceptable content, like the political diet these channels are fond of thrusting down our throats, then we can switch to something more palatable. The field is wide open for the three media houses to dominate the scene. But the probability of them doing so is very low. First they have to transform themselves into something better than what they are.

They must shed off the arrogance that has seen them assume that they can force the government to do their bidding. That they have been off-air for two weeks without anyone going on the streets to protest is a wakeup call. They need to change and change pretty fast.

 As for competition in issuing BSD licenses, inviting Media houses to bid for such licenses was uncompetitive in fact illegal.   In the analogue era, those with deep pocket s could hoard the frequencies thus denying others, the use of the same. For instance, Royal Media services, which owns Citizen TV owns 15 transmitter stations. Of these 5 are illegal because they were not licensed by CCK.  They could therefore hoard the frequencies from other deserving cases or they choke small stations to death.

So to ensure to ensure competition in the provision of services, the way to go is to bar the players –either directly or through proxies from applying for licenses. Just imagine Kenya Airways -or its proxies- getting a license to build a third terminal at JKIA. Would other airlines use it?  Imagine Modern Coast becoming the concessionaire on Mombasa road. Would Chania express ply the same route? That goes against the law of competition. The same is true of granting a BSD to NTV, Citizen and KTN or their proxy ADN. They would beat the competition to oblivion.

 In the new Business Model, the platform is something like ThIka highway handed over to a concessionaire so that motorists pay for use. The highway is open to all users provided they pay and obey the rules of use.  Matatus, Buses, bodabodas, trucks and HCVs can use the road provided they pay the requisite fee. No one is disadvantaged no one is favoured: All have equal opportunity. The only competitive edge is the quality of their service. 

In the new business model broadcasters are like Matatus plying Thika highway. Their copy right is their passengers inside their vehicles not the one waiting at the bus stop. That is the one they are competing for.

 So is CAK’s economics right? Damn right!

Tuesday, 13 January 2015

Low energy prices a boon for Kenya's economy 2015

LOW AND DECLINING energy costs are set to be the catalyst for economic growth in Kenya this year.  And - depending on how long the price of oil remains low- energy prices could remain key drivers in the short run. Analysts, including the World Bank expect crude oil prices to remain depressed into 2017.

This means Energy prices, coupled with infrastructure development, will determine the pace of economic growth, employment, investment, the shilling’s exchange rate and wealth distribution in Kenya. And going by the current energy trends, we may not be wide off the mark. 
Forget tourism, forget agriculture and insecurity.  Oil and electricity prices, coupled with infrastructure development, will drive growth in Kenya between 2015- and 2017.

 Let’s look at some numbers:  Crude Oil prices have declined from US$110 in January last year to US$43 yesterday, January 2015.  In January 2014, geothermal power provided only 179 MW or 24 per cent of the 747 MW produced then. Eleven months later, geothermal generated   323MW out of the 751 MW that is 43 per cent of the power generated in the country. The growth in power represented 143 Mw of new capacity. 

Last year, some 280 and MW of new geothermal capacity was added to the national grid.   Added to the existing capacity, some of which came after November, then geothermal capacity now stands at 459Mw of cheap and reliable power. This means that geothermal power production is now the leading source of power in Kenya.   We have noted significant declines in the price of electricity since August last year.

 Back to oil, the US$ 67 dollar decline is yet to be felt fully for pump prices are declining lethargically.  This is expected for price declines are rushing a head of the acquisition rate. In our case, it may be felt six week later.  Even the resistance downward by fuel price will soon fizzle out. Experts say that crude oil price will continue shrinking until investment in shale oil is unviable.

Economic theory tells us that, energy-oil and electricity- are important inputs in the process of producing and distributing goods and services. Consequently, the cost of energy will determine the price of the final product. We can therefore argue that energy determines the market size of goods and services: The higher the price of energy, the higher the cost of production, the higher the price of goods and services hence the smaller the market size as only a few consumers can afford.

 In Contrast, the lower the energy prices other things being the same, the lower the cost of production and consequently, the lower the price and the larger the market.  Local manufacturers have always complained about high energy costs keeping the price of local goods high and limiting their market.

 Now they have opportunity to fight counterfeiting of their products. Where law has failed, Price will succeed for the greatest incentive to counterfeit is the high price of genuine products.  If the price differential narrows or is eliminated, the incentive to counterfeit is also removed.  We expect that manufacturers will begin to lower prices in a bid to elbow out of the market the cheap substandard goods.  

The local manufacturers need a larger domestic market because larger market mean higher profits as the manufacturers expand capacity exploitation, which lowers the production cost per unit. Price declines put additional money in consumers’ pockets; it is more like a salary increase without taxes. This enables consumers to buy more goods and services, some of which were probably beyond their reach. As more people buy different products, demand for workers also rises.

 Low energy prices will also mean that fewer shillings leave the economy thus protecting its strength.  Kenya consumes an estimated 4.5 million tons of fuel products a year. In 2011, this was worth US$15.5 billion but as prices shot up, the bill rose to US$32 billion in 2012. That engineered a consumption decline as some Motorist parked their cars.  At the beginning of last year, the price of crude was US$110 per barrel. As the year drew to a close, crude had retreated to US$77 per barrel. To date the price is around $44 a barrel and is expected to shrink even further. The reason is simple, there is a glut in the crude market but the producers are not willing to cut supply. Suppliers in the Middle East are undercutting each other in the Asian market in a bid to maintain their market share there. This price war will not end soon.

 In the process, they are handing back to Kenya some US$60 per barrel going by the January 2014 price. Our crude import bill has been slashed by 60 per cent to around US$ 15 billion from the 2012 level of US$32 billion. In fact, a recent report by Kenya National Bureau of Statistics shows that by September, the oil bill was just about US$12 billion. This is an indicator that the oil bill last year did not exceed US$15 billion. We a made a massive national savings of US$17 billion from the oil bill alone. It could shrink further or remain the same.  Our balance of trade will be $17 billion richer. Consequently, US$17 billion in Kenya shilling equivalent or Kshs 1.5 trillion will remain in the country.

If the decline stays down for a long time, the government should renegotiate road construction contracts down. The prices of Bitumen and diesel, key inputs in roads construction are expected to shrink further, cutting the cost of building a kilometer of high quality road by half. Such reduction should be passed on to the government as budgetary savings which could be redeployed elsewhere. This is in addition to cost savings arising from low electricity and fuel prices.

 The government should start by re-negotiating the terms of the on-going PPPs for the construction of the first 2000KM of road through the PPP model. The project that will build 10,000KM of Bitumen roads by 2018 should be reviewed to bring down costs.  The savings so made should be used to develop water supplier to the large community thus employing more people.

 The 200KM project is expected to create some 20,000 jobs this year. Coupled with the construction of the standard gauge railway, which will create another 30,000 jobs and Konza techno city which will also create a large number of jobs, infrastructure development will be the driver of economic growth in the country. These are ingredients for economic growth. How far that growth will go we cannot tell for sure. However, we expect the economy to by 6-7 per cent this year.

 There is a downside though: The shrinking prices could slash investment in oil exploration.  In 2013, FDI into Kenya rose to more than US$500 million. Kenya has commercial deposits of crude oil and was expecting to start commercial production in 2017. Whether that goal will be affected remains to be seen. What is certain is; further exploration could be put on hold. 

Wednesday, 17 December 2014

East Africa primed to grow further, faster

EAST AFRICA, the fastest growing region in Africa, is slated for further rapid growth. Economic conditions favour such a growth say economists. The region has rebased it GDP which found that the economies of Uganda, Tanzania and Kenya were larger than previously estimated.

 The region’s wealth is 24 per cent larger than previously estimated. Currently, it is US$ 23.4 billion higher.  Before rebasing, the regional wealth stood at US$98 billion as at the end of last year. Now it stands at US$122 billion. And going by the fact that economic growth rates were found to have been higher than previously estimated, it is expected to be higher than previously estimated by the end of the current year.

 Kenya is still the leader as her total national wealth was $55.2 billion at the beginning of the year. This forms 45.3 per cent of the total regional wealth. Tanzania is second commanding 35 per cent (US$42.5 billion) of the regional wealth while Uganda is third at 20 per cent (US$24.6 billion).

As a consequence of the growth in regional wealth, the regional debt to GDP ratio has declined from an average of 47.6 per cent to an average of 39.1 per cent. Uganda was the more cautious borrower of the three with a national debt to GDP ratio of 39.8 per cent before the rebasing of the GDP accounting year to 2009/10.

 After rebasing this ratio decline to 29.2 per cent- a huge decline by any standards.  It was Uganda’s cautious borrowing approach that dragged the GDP-debt ration down both before and after rebasing. Tanzania was an aggressive borrower with a GDP-debt ratio of 53 per cent which declined to 42 per cent after rebasing. Kenya on the other hand had GDP-debt ratio of 50 per cent which decline to 46 per cent after rebasing.

The implication here is the debt ratio is comfortable and the countries can even borrow more to finance their development projects especially in the high impact infrastructure development. If spend prudently, any new debt will be manageable in future for the projects developed will generate further growth. Uganda is still grappling with  how to raise US$8 billion to build her section of the Northern Corridor Standard gauge Railway running from Kenya’s port of Mombasa to Kigali in Rwanda via Uganda.
  Kenya and Tanzania need additional funds to finance their infrastructure projects in transport and energy sectors. Kenya is the first off-the blocks having borrowed an estimated US$3 billion this year alone through sovereign bonds. The money will be used to finance energy and logistical infrastructure. Tanzania is revving to float a US$1 billion Eurobond next year.

 Another potential gain from rebasing the economy is the signal that each country can generate more domestic taxes to finance their budgets. The GDO tax ration has fallen from an average ratio of 19 per cent before rebasing the economies to 15 per cent after the rebase. Again Uganda was more cautious. Her GDP-Tax ratio stood at 13 percent before rebasing shrinking to 11.8 per cent after rebasing. Her neighbours were both in early 20s. This means that the governments should widen the tax next to generate more taxes internally to finance their budgets. This would mean further independence from meddling donors.

The three countries will finance on average, 76.5 per cent of the current budget from domestic sources. This is a major leap compared to 10 years ago when the region financed only about 55 per cent of their US$11 billion budget. Only Kenya, the largest economy in the block could finance her 2004/05 $6.7 billion budget from the domestic sources. Tanzania, whose budget in 2004/05 stood at $2.5billion, could finance only 59 percent of her budget from domestic revenue. Ten years later, Tanzania will finance to 61.4 per cent of a budget that is five times larger. The current budget stands at US$12 billion while domestic revenue will stand at US$7.4 billion.
Uganda, which financed 54 per cent of her budget estimated at US$1.8 billion ten years ago, will finance 82 per cent of the 2014/15 budget which is three times larger. The current budget stands at US$ 5.8 billion while the domestic revenue will stand at $4.8 billion.

Kenya for her part will finance 86 per cent of her US$20 billion budget from domestic revenue. This is to say she will raise some $17.7 billion from domestic revenue. This is a decline from the previous level where she funded 96 per cent of her budget which was a third of the current budget. The budgets are a confirmation that East African economies have been on a growth trajectory over the past decade creating opportunities for economic players, putting more money in people’s hands and reducing poverty.

 Now, east Africa can finance a larger proportion of their budget from domestic sources which will ensure prompt project delivery.  Donor funding is the cause of under development in Africa because the funds pledged are not delivered on time to complete the projects in question.

Coupled with the new ability to borrow more, the new larger tax base will ensure rapid development in the region if prudently managed.